What is Tax Increment Financing?
Tax Increment Financing (TIF) is source of revenue for local governments that is a targeted form of property tax. The funding formula is based on expected future increases in property value from an economic development project. The key assumption underlying TIF is that the project will increase property values, and thus assessments, leading to a more robust tax base for the locality. California was the first state to use the tool, and many states since then have adopted the practice into law. Minnesota legalized TIF financing approximately 50 years ago and has benefited from the ability to earmark future property tax revenue to support economic development projects.
The Case: Bloomington Central Station
Located along the Hiawatha Light Rail Line, Bloomington Central Station
is used here as a case study to evaluate TIF among four dimensions: adequacy,
efficiency, equity, and feasibility. Constructed
by McGough Company, the development will be one of the first mixed-use
“urban-villages” located on the Hiawatha line.
When complete, Bloomington Central Station is expected to provide 7,000
jobs and homes for 2,000 residents, and a 1.59 acre public park, among many
other community amenities. The site is
located in South Airport Loop, southeast of Interstate 494 and Cedar Avenue and
adjacent to the Minnesota River and Minnesota Valley National Wildlife
Refuge.
Adequacy Expectations and the Recession
TIF is an adequate source of revenue for local governments
because its purpose is to fund specific projects, which leaves little ambiguity
between expected and actual revenue.
Further, property values generally follow an upward slope, leading few
localities to question its adequacy over time.
For these reasons, TIF has leveraged the adequacy of property tax to
expand from small to large scale adoption among cities. However, the case of
Bloomington Central Station shows that the recent market downturn changed this
certainty. The following table depicts
the reality faced by community development officials mid-way through the
project, as revenue was declining just as the development was beginning. This fact has impacted the timeline for
completion. In order to remedy the unstable nature of this concentrated revenue
source, the State laws governing TIF should include a measure of
flexibility. For example, projects
approved under the laws prior to the new law should not be subject to the
changes. The
bigger question that remains is: How will the recession impact the
popularity of TIF as a revenue tool?
Bloomington Central Station Project
|
|
Year
|
TIF Revenue
|
2008
|
$ 845,337
|
2009
|
$ 845,096
|
2010
|
$ 731,627
|
2011
|
$ 552,475
|
2012
|
$ 507,290
|
2013
|
$ 485,000
|
Data from City of
Bloomington Port Authority, 2013
|
Recommendations to Increase Equity and Efficiency
TIF scores low in equity and efficiency because its purpose
is to reduce development costs in blighted areas by earmarking future property
tax revenues to pay for infrastructure costs that the developer would in other
cases assume. This cost shift makes the
development more attractive by reducing high risk in the blighted area. The process reduces efficiency by changing
the behavior of developers, and can also have implications for low-income and
other vulnerable populations. In the
case of Bloomington Central Station, redevelopment of an existing neighborhood
is not an issue as it’s a previously undeveloped
site. Thus, there is a balance
between incentives for economic development and preservation of existing
neighborhood dynamics. The question
remains: How can localities provide economic development incentives in
transit-oriented areas while benefiting existing residents?
Generating Revenue: Feasibility in Light of Equity Considerations
TIF may be more feasible than property tax because of cost
shifting to future tax revenue. This prevents localities from raising taxes on
current residents, which is a highly visible form of revenue generation. Localities implementing TIF districts may be
able to increase its feasibility among equity advocates by establishing a clear
nexus between the benefit received and cost paid. One method to accomplish this can be to
explicitly tie TIF-related expenditures to comprehensive plan goals and
policies through a community
benefits agreement. Bloomington
Central Station has not done this, however 20% of condo units are affordable to
households with incomes at 80% of the area median income.
Team 2
Bethany Brandt-SargentKaren DewanzAshley JamesLexi Prahl
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